- Do not focus on the stock price. Instead, focus on earnings. The fluctuation in stock price is just a distraction.
- Liking a product of a company should be the basis for you to dig in deeper and determine the financial health of the company: earnings, anticipated growth, competitve landscape, and overall financial health of the company
- Identify where the growth is coming from and how a slowdown might occur and how soon. It’s one thing to invest in a company that has 90% of the marketshare vs 10%
- All you will need for a lifetime of successful investing is a few winners – maybe 6 out of 10 stocks, and those will more than offset the losing positions.
- “If there were a way to avoid the obsession with the latest ups and downs, and check stock prices every six months or so, the way you’d check the oil in a car, investors might be more relaxed”
- “The odds against making a living in the day-trading business are about the same as the odds against making a living at racetracks, blackjack tables, or video poker.” Plus all the paperwork that goes into filing such trades
- Do not invest money you’ll need within the next 12months. When you invest, it’s time in the market.
- “As I’ve noted on prior occasions: “That’s not to say there’s no such thing as an overvalued market, but there’s no point worrying about it.””
- “When you sell in desperation, you always sell cheap. Even if October 19 made you nervous about the stock market, you didn’t have to sell that day—or even the next. You could gradually have reduced your portfolio of stocks and come out ahead of the panic-sellers, because, starting in December, the market rose steadily.”
- Peter lists three reasons not to listen to experts, newsletters, or so called professionals when it comes to buying stocks:
- They could be wrong – average 40% of the time for Peter himself
- You do not know when they’ll sell
- There are good ideas all around you
- One interesting idea the author raises is to compare how much money you would have made if you bought GAP stocks along with you buying jeans from GAP or if you bought Subaru stocks. Same with hotels you stay in, etc
- “But even if you missed the highs or the lows, you would have done better to have invested in any of the familiar companies mentioned above than in some of the esoteric enterprises that neither of us understands.”
- “Before you buy a share of anything, there are three personal issues that ought to be addressed: (1) Do I own a house? (2) Do I need the money? and (3) Do I have the personal qualities that will bring me success in stocks?”
- It seems to me the list of qualities ought to include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness
- The true contrarian isn’t someone who does exactly the opposite of what they deem to be the popular view – eg: short a stock that is hot. The true contrarian wait for things to cool down and buys things that nobody cares about.
- The trick is not to trust your gutfeelings but to stand by your decision on the stock as long as the fundamentals have not changed
- Put an effort researching the stock that you want to buy much like you put an effort researching at cheap flight ticket or which detergent to buy based on the price per gram.
- “If you’re considering a stock on the strength of some specific product that a company makes, the first thing to find out is: What effect will the success of the product have on the company’s bottom line?”
- Generally speaking, companies that are smaller in size has the potential outperform super big companies. From there, you’ll need to bucket stocks in terms of their growth rate: fast, slow or average. You’ll
- A company growth rate could be compared to its peers or the industry’s average. If the industry growth slows down, that willl inevitably be reflected on the companies in that sector.
- Slow growers: 2-4% in earnings on an annual basis
- Stalwarts: these are large companies but are still managing to grow at a faster clip than slow growers, something like 10-12% a year. If a stalwart grows by 50% in a year or two, you should consider selling, that is unless they have come up with something completely new that is turbo-charging their growth.
- During a recession, people buy fewer new cars, go out to restaurants less, take fewer vacations, but they will still eat Kellogg’s corn flakes and buy food for their pets. We’re talking cyclicals vs staples here.
- Fast Growers: Peter Lynch’s favorite. they grow at 20%-25%+ a year. They’re the ones that can be a 10-40+ baggers. If you strike one or two of those in your portfolio, they can be game changers.
- A fast grower doesn’t have to be in a fast-growing industry. Matter of fact would be better if it is not. Eg: Walmart in the store business, Gap in clothing retail,
- A company growth rate could be compared to its peers or the industry’s average. If the industry growth slows down, that willl inevitably be reflected on the companies in that sector.
- Watch for internal buying as a signal with lower-ranking employees creating a stronger buying signal.
- “There are five basic ways a company can increase earnings*: reduce costs; raise prices; expand into new markets; sell more of its product in the old markets; or revitalize, close, or otherwise dispose of a losing operation. These are the factors to investigate as you develop the story. If you have an edge, this is where it’s going to be most helpful.”
- “If the prototype’s in Texas, you’re smart to hold off buying until the company shows it can make money in Illinois or in Maine. That’s what I forgot to ask Bildner’s: Does the idea work elsewhere? I should have worried about a shortage of skilled store managers”
- “We’ve gone on about this already, but here’s a useful refinement: The p/e ratio of any company that’s fairly priced will equal its growth rate…But if the p/e ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year (also known as a “12-percent grower”) and a p/e ratio of 6 is a very attractive prospect.”
- “A normal corporate balance sheet has 75 percent equity and 25 percent debt.”
- “Every few months it’s worthwhile to recheck the company story. This may involve reading the latest Value Line, or the quarterly report, and inquiring about the earnings and whether the earnings are holding up as expected. It may involve checking the stores to see that the merchandise is still attractive, and that there’s an aura of prosperity. Have any new cards turned over? With fast growers, especially, you have to ask yourself what will keep them growing.
- Checklist for when you consider a stock
- P/E: and how it compares to the industry’s, competitors and historical norms
- Institutional ownership: the lower the better
- Insiders’ buying and stock buyback
- The record of earnings growth to date and whether it’s been consistent or sporadic
- Whether the company has a strong or weak balance sheet (debt to equity ratio) and how it’s rated for financial strength
- The cash in general: the more the better
- Checklist for Slow Growers:
- Since you buy these for dividends, check the history of the dividend: how long it has been consistently paid and increased?
- Does the dividend constitute a relatively low percentage of earnings – ie: cushion during recessions?
Tarek Naim's Blog 